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6 Not-To-Be-Missed Tax Implications of COVID-19 On Your 2020 Small Business Taxes

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COVID-19 Tax Implications

Like everything else 2020, taxes will be like no other due the COVID-19 pandemic. Here are some COVID-19 related tax implications you should pay attention to for your 2020 business taxes.

Paycheck Protection Program Loan Forgiveness

The Paycheck Protection Program is a loan program that originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This was originally a $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans backed by the Small Business Administration (SBA).

The program was then expanded by the Paycheck Protection Program and Health Care Enhancement Act in late April, adding an additional $310 billion in funding. Then on June 15th, the Paycheck Protection Program Flexibility Act made important changes to the program, by allowing for more time to spend the funds, and making it easier to get a loan fully forgiven.

Tax Implication: When a PPP loan is forgiven, it does not have to be included in the business’s gross income for federal income tax purposes. These forgiven loans are also not counted as taxable income for federal income tax purposes. However, the expenses paid with the PPP proceeds are not allowed as a tax deduction for tax purposes per current guidance from the IRS.

Home Office Deductions

Traditionally, an employee could potentially claim itemized deductions for unreimbursed employee business expenses, including home office expenses — if the office was used for the convenience of the employer. However, all that changed in 2018. The Tax Cuts and Jobs Act passed in 2017 eliminated employee business expenses on Schedule A. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) suspended write-offs for miscellaneous deductions that were formerly subject to the 2%-of-AGI rule.

Tax Implication: Employees are not eligible to claim the home office deduction, even if an employer requires remote work because of COVID-19. So how does this affect you as a small business owner? That depends on how your business is structured legally and internally. If your business is taxed as a corporation and you use part of your home as a business office, it means that you may be able to deduct home office expenses including rent/mortgage, utilities on your federal business taxes. You may also be able to do the same if your small business is taxed as a partnership (LLC) as long as you are classified as self-employed rather than an employee of your own business. Sole proprietors are also allowed to take home office deductions. Consult with your tax advisor to be sure.

Employee Retention Tax Credit

The Employee Retention Credit is a refundable tax credit for businesses that have had their operations partially suspended or had a significant decline in revenues due to COVID-19. The tax credit is equal to 50% of qualified wages for employees per calendar quarter up to $10,000, so the maximum credit per employee is $5,000. Your business can take the tax credit against your share of social security taxes as an employer by not withholding these taxes. You can claim the credit on your quarterly payroll tax report (Form 941).

Tax Implication: Any tax credit you receive isn’t included in your business’s gross income for federal income tax purposes, but you can’t deduct the amount of the tax credit as an expense for your 2020 business tax return.

Payroll Tax Deferral

On August 8, 2020, a presidential memorandum known as the Payroll Tax Deferral was issued allowing employees to defer their part of Social Security tax for wages from September 1, 2020 to December 31, 2020. Any employees who requested this deferral must repay by agreeing to the employer withholding the total amount between January 1, 2021 and April 30, 2021. This will result in double withholding for these employees until the full amount is paid back. If the employee is no longer working for you or can’t otherwise make these payments, consult an attorney to find out your options.

Tax Implication: If you deferred payroll tax for any of your employers, you must report the deferred amounts on Form 941 for the applicable quarter and work with the employees to take the additional withholding from their paychecks in 2021.

Deferral of Employer Portion of Social Security Tax

The CARES Act includes a provision that allows businesses to defer the employer portion of FICA taxes (Social Security and Medicare) during 2020. The deferred amounts may be deducted from required FICA tax payments. They must be reported on the quarterly wage and tax report (Form 941) and must be repaid, half by the end of 2021 and half by the end of 2022.

If you are self-employed, you could defer payment of the 50% of the Social Security tax on your net earnings from self-employment for the period from March 27, 2020 to December 31, 2020. Then, you must repay the deferred amounts using the same schedule as employers.

Tax Implication: If your small business elected this deferral, it is entitled to a tax deduction for these taxes depending on which type of accounting system you use.

  • A business on an accrual basis is entitled to the deduction in the tax year the payment is due.
  • A business on a cash basis is entitled to the deferral in the tax year the payment is made

Deferral of Tax Credits for Sick Leave and Family Leave Payments

The 2020 Families First Coronavirus Response Act (FFCRA) gives small businesses refundable tax credits to cover the cost of providing employees with required paid sick leave and expanded family medical leave due to COVID-19. The tax credits program runs from April 1, 2020 through December 31, 2020.

You can receive the tax credits for payments you made to individuals for sick leave or family leave for coronavirus situations and also for costs to maintain health insurance for eligible employees. You can reclaim the credits through your quarterly employment tax return (Form 941).
These tax credits are also available to self-employed business owners who take sick leave and family leave for coronavirus-related reasons.

This tax credit program is complicated, with eligibility requirements and time limits. See this comprehensive article from the IRS with FAQs on the COVID-19-Related Tax Credits.

Tax Implication: Payments to employees under this program are taxable to them, and they are subject to withholding of FICA taxes (Social Security and Medicare) and federal income taxes.10
The employer must include the full amount of the credits for qualified leave wages in its gross income for the year. Employer payments of qualified sick pay and family leave wages are deductible as business expenses. The proper amount deductible by the employer is the amount of federal employment taxes before reduction by the tax credits.

The Bottom Line

Whether your business experienced big ups or downs this year, 2020 has been a year like no other. Like everything else 2020, taxes will be like no other. There are many things to consider this year when preparing and filing your 2020 taxes. You will need an experienced tax professional to account for all the considerations to avoid unnecessary penalties and/or overpaying. You may learn more about how we can help you in this regard here.

Something Wasn't Clear?

Feel free to contact me, and I will be more than happy to answer all of your questions.

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